Rent-Free House Perquisite Formula Changes in Income Tax Rules Draft: 2011 Census and New Slab Rates

Rent-free accommodation is one of the highest-value benefits in many salary packages. It looks simple on paper: the employer provides a house, and the employee stays there. In tax terms, the benefit is not free. The Income-tax rules treat it as a perquisite and add a computed value to the employee’s salary income for tax and TDS.

The Income-tax Rules, 1962 handle this under Rule 3, through Table I for residential accommodation.The Draft Income-tax Rules, 2026 move the same subject to Rule 15, through Table I for residential accommodation.

The draft changes two big levers that decide tax impact:

1. City population base shifts from 2001 census to 2011 census, with new population cut-offs.

2. Slab rates for employer-owned accommodation change, and the lease cap percentage also changes.

Where the draft rules place the rent-free house formula

In Draft Rules 2026, Rule 15(2) sets the valuation of residential accommodation by linking it to Table I and related clauses.Rule 15(1) also states that perquisites provided by an employer to an employee or a member of the employee’s household are valued under this rule.

In the 1962 Rules, the same structure sits inside Rule 3, which states that perquisites are valued under that rule and then provides Table I for residential accommodation.

So the subject is the same, but the rule reference changes from Rule 3 to Rule 15.

The core framework that stays the same

Both the old and the draft rules value accommodation based on:

• Whether the employer is Government or non-Government

• Whether the accommodation is owned by the employer or taken on lease/rent

• Whether the accommodation is unfurnished or furnished

• Rent paid by the employee, which reduces the taxable value

Both rules also keep a furnished-house add-on: perquisite value increases by 10% per annum of the cost of furniture (or actual hire charges if furniture is hired), reduced by charges paid by the employee.

What changes in the draft: employer-owned accommodation slab rates

Old rule (Income-tax Rules, 1962)

For accommodation owned by a non-Government employer, the perquisite value for unfurnished accommodation is:

• 15% of salary in cities with population exceeding 25 lakhs (2001 census)

• 10% of salary in cities with population exceeding 10 lakhs but not exceeding 25 lakhs (2001 census)

• 7.5% of salary in other areasAll reduced by rent paid by the employee.

Draft rule (Draft Income-tax Rules, 2026)

For accommodation owned by a non-Government employer, the perquisite value for unfurnished accommodation becomes:

• 10% of salary in cities with population exceeding 40 lakhs (2011 census)

• 7.5% of salary in cities with population exceeding 15 lakhs but not exceeding 40 lakhs (2011 census)

• 5% of salary in other areasAll reduced by rent paid by the employee.

What this means

Two shifts happen at once:

1. Percent rates fall: 15 → 10, 10 → 7.5, and 7.5 → 5.

2. Population bands move upward: 25 lakh/10 lakh (2001 census) becomes 40 lakh/15 lakh (2011 census).

So an employee’s taxable perquisite value depends on both the city’s population category and the new percentage slabs.

Lease or rent cases: the cap percentage changes

Not every employer owns the house. Many employers take accommodation on lease or rent and then provide it to the employee.

Old rule (1962)

If the employer takes accommodation on lease or rent, the perquisite value is:

• Actual lease rental paid or payable by the employer or 15% of salary, whichever is lower, reduced by rent paid by the employee.

Draft rule (2026)

If the employer takes accommodation on lease or rent, the perquisite value is:

• Actual lease rental paid or payable by the employer or 10% of salary, whichever is lower, reduced by rent paid by the employee.

Why this change matters

The draft reduces the salary-based ceiling from 15% to 10%. That change affects high-salary employees in leased employer housing, where lease rent is high and salary percentage acts as the limiting factor.

Hotel accommodation: the 24% salary cap stays

Both rules deal with hotel accommodation as a separate line item. In the draft, Table I states that the perquisite value for hotel accommodation is the lower of:

• Actual hotel charges paid or payable, or

• 24% of salaryReduced by rent paid by the employee, with an exception for a short period on transfer.

This part stays aligned in structure and the key 24% figure.

Site accommodation and remote area: plinth area limit changes

Both rules provide that certain temporary accommodation at project sites, mining sites, oil exploration sites, dam sites, power generation sites, or off-shore sites falls outside the rule, subject to conditions.

A clear numeric change shows up in the draft:

• Old rule: plinth area limit is 800 square feet.

• Draft rule: plinth area limit becomes 1000 square feet.

This change expands the space limit that qualifies under the site accommodation exception.

New draft feature: cap linked to Cost Inflation Index for multi-year continuation

Draft Rule 15 adds a clause for cases where the same accommodation continues for more than one tax year. It states that the amount calculated under Table I for Sl. No. 2(a) or 2(b) shall not exceed the first-year amount multiplied by the ratio of the Cost Inflation Index (CII) of the current tax year and the CII of the year in which the accommodation was first provided.

This CII-linked cap is a notable structural addition in the draft text and is not part of the excerpted 1962 Table I structure shown in your file.

For payroll teams, this clause requires tracking the first-year perquisite value and applying the CII ratio for later years.

What employees and employers must do in practice

For employees

• Ask payroll which table and census category the employer applied for your city.

• Keep proof of rent paid to the employer, since rent reduces perquisite value in both rules.

• If the accommodation is furnished, confirm how the furniture cost or hire charges were captured.

For employers and payroll teams

• Map each work location to the correct population band as per the rule text and census base used in the applicable rule.

• Apply the correct salary percentage for owned accommodation and the correct cap percentage for leased accommodation.

• Track continuation beyond one tax year and apply the CII-based cap where Rule 15(2)(d) applies.

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